COVID-19 And Demonetization: How Have They Affected India?

The situation as of June 2020:

In the month of February of 2020, the novel coronavirus disease that originated in the province of Wuhan, China, was declared a global pandemic by the World Health Organization. Ever since, countries have been locking themselves out of worldly matters to attend to their nation’s people, sick or not. Various gridlocked quarantine efforts have been undertaken by almost all major and minor countries around the world in order to fight the spread of the disease.

COVID-19, as of June 2020, does not have a cure. The best (and only way) to treat the disease is by keeping the symptoms under control, and managing them as they show up. The virus, officially named SARS-CoV-2, is a novel strain of the already known Severe Acute Respiratory Syndrome (SARS) that had originated from China as well.

Only forty months before the start of what would be a very long lockdown for the citizens of India, on the fateful night of November 8, 2016, Prime Minister Narendra Modi appeared live on national broadcasts to demonetize the largest bills that were in circulation back then, the INR 500 and INR 1000 notes. As the largest currency carriers of the country were now devalued in place of a new INR 500 and INR 2000 notes, the country scrambled over the course of the next six months to exchange the old, worthless pieces of paper for the new, gleaming green-and-pink currency carriers.

Thanks to these delicate events occurring back-to-back, it has put India in a very delicate position – will it affect India positively?

The impact of demonetization:

A paper published by the International Journal of Management Studies titled “Impact of Demonetization on Indian Economy: A Critical Study” states that demonetization is a process by which currency units do not remain legal tender. It is a basic condition to change national currency where new units of currency replace the old one. A 2017 paper written by E. Kamatchi Muthulakshmi (Impacts of Demonetization on Indian Economy Issues & Challenges) states that when money is withdrawn from the economy, it does not benefit the country in the short run, but can have a meaningful impact if money paves its way into the economy.

It has been a common opinion among those in the field of economics that the demonetization of INR 500 and INR 100 notes in the month of November 2016 is a “big shock for the average Indian citizen”. While it is a legitimate and proven way to fight black money and corruption, sudden and unplanned steps to withdraw the largest currency carriers out of the economy with an element of surprise adversely affects the average citizen as much as it is expected to affect holders of black money and corrupt institutions.

In another 2017 paper, Ayash Yousuf Shah had stated that 86% of all currency notes were withdrawn from the market while new notes were not being printed fast enough, leading to “the thrashing of market transactions”. While the targeted people remained in their comfort, common people were collateral damage in the process, facing problems when it came to exchanging their decrepit, worthless currency notes for the newer ones; due to the unplanned implementation of an economy-transforming act, the collateral damage was higher than the actual target damage.

Some experts and researchers agree that while the demonetization of 2016 may have been a failure from some perspectives, it was a huge success in comparison to the previous demonetization in the country that took place during the years of 1946 and 1978. Due to technological advancement, the cashless infrastructure of the nation is better built to cope up with the needs of such events ever since, and the banking sector has provided their support throughout the years in order to keep financial transaction transition as smooth as possible under the given circumstances.

The impact of COVID-19:

The definitive conclusion that one can arrive at in consideration of the spread of COVID-19 in India is that its economy will definitely take a hit, thanks to the now-inoperable sectors of tourism, aviation, and international trade.

Ever since the lockdown in the month of March 2020, all hotspots of travel and tourism are now clusters and gatherings of potentially diseased people, due to the fact that SARS-CoV-2 is a silent inhabitant in hosts. With symptoms usually presenting in the host after fourteen days of infection, all it takes is an accidental sneeze to spread the virus to other people.

The R value of the disease, as of May 2020, fell to a moderate 1.22 – this means that a single infected person can spread the infection to 1.22 people, or that five infected people can spread the disease to six other people. This value tends to change depending upon immunity factors, protection measures, and various other actions that affect the spread of the disease. In comparison, the R0 value (at the beginning of the pandemic) in India was at a relatively high 1.83; every five infected people could spread the disease to nine other people. The 33% fall in the value is proof that social distancing and local quarantines work to stop the spread of COVID-19.

While the fall of the R value is good news in itself, it must be brought below 1 in order to completely arrest the spread of the pandemic. For example, an R value of 0.5 would imply that it takes two infected people to affect one healthy person.

India’s economy since 2015:

In a December 2018 paper assessing the impact of demonetization on India’s economy, the authors used Reserve Bank of India data to construct a metric called the “local area demonetization shock”. It is the ratio of post-demonetization to pre-demonetization currency in a given area. On an average, areas were found to have retained 42% of their currency post-demonetization in comparison to pre-demonetization levels.

Using a household survey of employment and satellite data on human-generated nightlight activity, the paper measured the “adverse effect on real economic activity [sic]”. The study pointed to a contraction in employment and nightlight-based outputs of two percentage points due to demonetization, the effects of which may have dissipated over the course of the year of 2019.

On the other side of the coin, COVID-19 seems to have caused lesser collateral damage in the country, in comparison to others. While the stall on the growth of global economy is felt worldwide, now more than ever – the sooner we eradicate the virus, the faster we can grow in the long run.

Despite a slower curve of infection in India, the impact on the country has been significant and quite ruthless. The initial lockdown is estimated to have costed the country USD 4.5 billion every single day. This is due to nearly half of India’s businesses being disrupted and disturbed, adversely affecting supply chains that have fallen victim to the pandemic of SARS-CoV-2.

The nation has kept a flatter infection curve in comparison to other countries of the world, in their battles against the virus. This is a direct implication of low collateral damage, albeit nothing can be said about what is to come. While the global economy is on the slow track to progress, first world countries will be on the lookout for cheap outsourcing solutions. And where better to look for than an established hub for taking up outsourced projects than India?

The drive to look for alternatives by various other countries of the world is a beneficial agenda for India, and can potentially be the threshold for its footsteps into multiple trade channels as a supplier of raw materials and manufactured goods as well.

Due to the epicentre of the disease being China, various manufacturers have already shifted their production centres to India as an alternative. Infrastructural development around manufacturing facilities and a boost to employment is a positive impact on the nation’s economy, irrespective of whether it had slowed down or continued to grow as normal.

Impact of demonetization? Short-term negative. Impact of COVID-19? Economically positive, lifestyle-wise inconclusive.